Valuation evidence for earn-outs and deferred consideration: at signing, not after the dispute.

An earn-out valuation in Australia establishes the market value of contingent consideration in a business sale: deferred payments that depend on future revenue or EBITDA performance. Oliver Group values earn-out rights using probability-weighted scenario analysis, prepared with the Subdivision 118-I look-through conditions, AASB 3 contingent consideration measurement and small business CGT concession thresholds in mind.

When an earn-out valuation is required

An earn-out valuation is required whenever a business sale includes deferred consideration contingent on future performance: at signing, so the seller's capital proceeds, the buyer's accounts and any concession thresholds all rest on a contemporaneous number rather than one reconstructed later. Earn-outs bridge a price gap: the buyer pays part of the price now and the balance only if the business performs. That solves the negotiation but creates two hard problems. First, what is the contingent right actually worth today? Second, how do the CGT look-through rules in Subdivision 118-I of the ITAA 1997 treat it, and what happens if the arrangement fails a condition? Both questions are best answered before a payout is disputed or the ATO reviews the position, not after.

Look-through earnout rights under Subdivision 118-I

Where the conditions are met, a look-through earnout right is effectively ignored as a separate asset: the seller disregards any capital gain or loss on the right itself, and financial benefits received or provided adjust the capital proceeds or cost base of the underlying asset, with amendments back to the year of the CGT event. The main conditions: the right is created under an arm's length arrangement for the disposal of a CGT asset; the future payments are contingent on the economic performance of that asset, or of a business in which it is reasonably expected to be an active asset; the payments are not reasonably ascertainable when the right is created; all financial benefits must be capable of being provided within five years after the end of the income year in which the CGT event happens; and the right was created on or after 24 April 2015. The five-year condition fails if a side arrangement could stretch payments beyond that period. If any condition fails, the right is generally a separate CGT asset: its market value at signing forms part of the seller's capital proceeds, and that market value must come from somewhere defensible. Oliver Group provides the valuation evidence; your tax adviser confirms the legal application: we are not a registered tax agent and do not give tax advice.

How we value the contingent right: and why deal design moves the number

We model the earn-out metric, revenue, EBITDA or another defined measure, across a range of performance scenarios grounded in the business's forecast history, apply the contractual payout formula to each scenario, weight the outcomes by their assessed likelihood, and discount at a rate reflecting both the risk of the metric and the credit risk of the party obliged to pay. Deal design feeds directly into that model, which is why two earn-outs with the same headline maximum can have very different values. A cap truncates the upside, so scenarios above the cap add nothing: a capped earn-out on a volatile revenue metric may be worth far less than face value. A collar or floor guarantees a minimum, shifting part of the payment towards deferred fixed consideration and raising value. Metric choice matters as much: revenue targets are harder for a buyer to suppress but easier to hit without profitability; EBITDA targets track economic performance but are exposed to post-completion accounting policy and cost-allocation decisions. Binary cliff targets concentrate risk at a single line; graduated payouts smooth it. The result is a supportable range and a concluded position at the point the methodology and evidence best defend, with every scenario, weighting and rate recorded in the working file: because in a review, the question is never just the number, it is whether the assumptions were reasonable at the valuation date.

AASB 3: contingent consideration for acquirers

For an acquirer applying AASB 3 Business Combinations, contingent consideration is recognised at its acquisition-date fair value as part of the consideration transferred. Contingent consideration classified as a liability is remeasured at fair value each reporting date with changes through profit or loss; equity-classified contingent consideration is not remeasured. Auditors expect a supportable model behind both the day-one number and each remeasurement: documented scenarios, weightings and discount rates, not a management estimate asserted without workings. Oliver Group prepares the initial fair value assessment and can provide updated assessments at subsequent reporting dates as the earn-out period runs.

Earn-outs and the small business CGT concessions

An earn-out right can affect eligibility for the Division 152 small business CGT concessions because the maximum net asset value test is applied just before the CGT event, and that test turns on values that are contingent at that moment. Where a look-through earnout right applies, capital proceeds change as financial benefits are received, and concession calculations made in the year of sale may need to be revisited: the tax adviser manages those choices and amendments, but each one rests on substantiated market values. Where the $6m threshold is marginal, or the concession outcome depends on how the earn-out right is valued, the file needs a defensible value for both the business and the contingent right, prepared with ATO market valuation expectations in mind. We identify the most supportable position the evidence allows; we do not adopt positions to engineer eligibility.

Documents we need

• ·Sale agreement or term sheet with the earn-out clause (draft is fine pre-signing)
• ·Payout formula, caps, collars, thresholds and metric definitions
• ·Last 3–5 years of financial statements and current management accounts
• ·Management forecasts covering the earn-out period, with key assumptions
• ·Budget-versus-actual history as evidence of forecast reliability
• ·Details of any fixed deferred consideration and security arrangements
• ·Buyer covenant or credit information, where available
• ·Adviser instructions on the tax and accounting positions the valuation supports

Package recommendation

Fees are fixed at engagement and never contingent on the outcome. Oliver Group's fees are set by the annual turnover of the business: a Small Business Valuation is $1,495 + GST for turnover under $2 million, a Medium Business Valuation is $2,495 + GST for turnover between $2 million and $10 million, and a Large Business Valuation is $3,495 + GST for turnover over $10 million. Small-business reports are delivered in 2 business days and medium-business reports in 3 business days; the delivery date for a Large Business Valuation is agreed before commencement. Delivery time starts once payment and all required information have been received. Retrospective valuation dates are +$495 each and additional entities are +$795 each. The fee is fixed in writing before work begins and never depends on the concluded value.